Created through the Taxpayer Relief Act of 1997, the Roth IRA offers the opportunity to save and invest for retirement. The Roth IRA holds several significant advantages over the traditional IRA:

• The financial assets of a Roth IRA can be passed tax-free to heirs, which make it an attractive component of one’s estate plan.

• As long as you are over the age of 59 ½ and have held your Roth IRA for 5 years, the distributions (contributions and earnings) are federally tax-free. These are generally referred to as qualified distributions or withdrawals.

• Do not have to take the required minimum distributions beginning at the age of 70 ½.

• The 10% penalty for early withdrawal is waived in any of the following situations: death, disability or to make a first-time home purchase up to
$10,000.

• All contributions to a Roth IRA are made with after-tax dollars and are not tax-deductible. The money including the contributions and earnings can potentially grow tax-free.

• May be used in certain circumstances to pay for qualified higher education expenses, health insurance premiums or medical expenses.

• Contributions can still be made with earned income past the age of 70 ½ .

• Could appeal to individuals who expect to be in the same or higher tax bracket in retirement.

While the overriding advantages of a Roth IRA are clearly enticing, before plunging into such an investment, it is essential to bear a few considerations in mind. As with all IRA investments, there are many complex rules and guidelines. Roth IRAs are certainly no exception. Let us briefly go over the 4 core aspects of Roth IRAs: eligibility requirements, contributions, investment options and types of accounts which can be converted to a Roth IRA.

Who Is Eligible To Invest In A Roth IRA?

There are no age restrictions to opening a Roth IRA. Anyone with earned income is eligible to contribute to a Roth IRA as long as their income falls below or within the modified adjusted gross income (MAGI) limits. Because of the income level limits, however, not everyone is eligible to contribute to a Roth IRA.

How Much Can I Contribute?

How much one can contribute to a Roth IRA depends on the age, filing status and income of the individual. The maximum contribution for tax year 2011 is $5000 for an individual under the age of 50. For those aged 50 and over the catch-up contribution is an extra $1000. For example, a single individual with a modified adjusted gross income of less than $107,000, filing separately, is eligible to contribute the maximum to a Roth IRA for the tax year 2011. For a married couple under the age of 50, filing jointly with a modified adjusted gross income of less than $169,000, the contribution would be $5000. It is important to note that income limits may change yearly so it is prudent to check with your accountant.

Investment Options

Indeed, Roth IRAs offer tremendous flexibility when it comes to investment choices. The most common investments are bonds, certificates of deposit, exchange-traded funds and mutual funds. Investing in real estate is also an option with certain stipulations. A Roth IRA can only be opened with a financial institution which is approved by the IRS to offer IRA accounts.

Can I Convert To A Roth IRA?

There are many types of retirement accounts that are eligible for conversion to a Roth IRA. Retirement accounts such as the traditional IRA, rollover IRA, 401(k), 403(b), Sep-IRA, Simple IRA and profit-sharing can be converted to a Roth IRA as long as specified income limit guidelines and other applicable conditions are met. Partial conversions are permissible. However, a Roth IRA conversion does incur taxes.

Closing Thoughts

The tremendous flexibility and options that a Roth IRA provides; to be able to make federally tax-free withdrawals in order to create a stream of retirement income and not have to take required minimum distributions beginning at age 70 ½ make it a highly attractive option for retirement planning as well as an effective estate planning tool. Whether or not a Roth IRA is appropriate for you, will depend on a clear analysis of your personal situation, tax status, income, savings, retirement plan, distribution and estate planning needs. In this brief discussion, we have only focused on the most basic aspects of Roth IRAs. Hopefully, it will encourage individuals to learn about Roth IRAs more fully.


For informational purposes and not intended as advice. While every attempt is made at accuracy, the author does not claim that the content is free of factual errors.